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Investing in property – consider liquidity risk

Buying or selling units in the M&G Property Portfolio has been suspended. We explain why this has happened and whether there is a risk to other property funds.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please
seek advice. If you choose to invest the value of your investment will rise and fall, so you could get
back less than you put in.

Kate Marshall, Senior Investment Analyst

5 December 2019

In the wake of the UK's decision to leave the EU in 2016, investors became concerned over the prospects for the UK property market. This resulted in heightened outflows from property funds, and a number suspended trading, meaning investors were unable to buy or sell units in these funds.

These property funds subsequently resumed trading, but Brexit uncertainty has persisted. Most recently it's led to some uncertainty over the outlook for UK retailers, and another uptick in redemption requests. As a result, M&G has suspended its Property Portfolio fund, which has a high level of exposure to this sector.

Why has this happened?

Unlike shares, property can’t be sold quickly. Most property fund managers will keep some cash available so they can easily give investors their money back. But if many people choose to sell their units in a fund at a similar time the level of cash in the fund can fall quickly. The managers might then be forced to sell properties to raise more cash.

This isn’t the best outcome for investors who want to stay invested in the fund. Selling property can be expensive, and the manager might have to sell properties they’d rather keep, or accept a lower price to secure a quick sale.

In order to avoid this, in some cases, the fund manager will suspend dealing in the fund. This prevents more investors from selling, giving the manager time to sell their property holdings. But it means investors can’t get access to their capital if they need it. Although temporary, the fund could be shut for a few months.

Stopping investors from selling is usually a last resort for property fund managers. But it’s not entirely unusual. Some funds did this during the 2008 financial crisis and, as mentioned above, the same thing happened as recently as 2016.

Importantly, these funds should only be considered as a long-term investment. If a fund is suspended, it can take many months before investors can sell and withdraw their capital. This should be a consideration for any investor who may need their money in the short term.

Liquidity in open-ended funds

Unit trusts and ‘open-ended’ funds are not ideal vehicles for investing in physical property. Under normal circumstances if there are a greater number of buyers, new units are created, and, if there are a greater number of sellers, units are cancelled. Usually this situation causes fund managers few problems.

However, outflows at times of pessimism can be problematic. When lots of investors sell at the same time and the fund’s cash buffer is reduced the fund manager has to sell assets. Buying or selling any kind of physical property is a lengthy and labour-intensive process, so trading daily isn’t possible. This is one of the reasons why we do not feature any property funds on the Wealth 50 list of our favourite funds.

Since 2016, when a number of funds in the sector temporarily closed, many property funds have maintained higher levels of cash, which can help meet demand in the event of heightened levels of redemptions. However, there are no guarantees property funds will not suspend dealing in the future and investors should be aware of the risks.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek
advice. If you choose to invest the value of your investment will rise and fall, so you could get back
less than you put in.

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Our website offers information about investing and saving, but not personal advice. If you're not sure which
investments are right for you, please request advice, for example from our financial
advisers. If you decide to invest, read our important investment notes first and
remember that investments can go up and down in value, so you could get back less than you put in.